Saudi Aramco's diversification could swell IPO valuation

Any valuation of Saudi Aramco this far out from its IPO is premature, as the oil giant delves deeper into downstream businesses and technology whose potential – and worth – are yet to be realised.
Riches Saudi Aramco said its oil reserves held steady last year.
By Courtney Trenwith
Sat 15 Jul 2017 10:13 AM

There has been much speculation about the value of the world’s biggest oil exporter, Saudi Aramco.

Crown Prince Mohammed bin Salman, the architect of the upcoming initial public offering (IPO), is adamant $2 trillion is accurate, while conservatives have suggested as little as $880m and the consensus is narrowing in on $1.5bn.

The value is difficult to predict for a myriad of reasons, including Aramco’s complicated involvement in an array of domestic activities totally unrelated to oil and gas. But its recent change in strategy is also yet to reveal its full potential.

The oil giant is doing what nearly everyone in the GCC is doing these days - diversifying. Just where that will lead it over the next 12-18 months before the IPO cannot be determined, at least by the public, including potential investors.

While CEO Amin Nasser still believes the petroleum industry will fuel global energy for many more years and the transition to alternatives will be “long and complex”, Aramco is taking steps to ensure it is not left behind in the green race.

The company’s 2016 annual review, released earlier this month, dedicates more pages to its growing downstream businesses, renewable energy projects and technology than it does to its historic core of oil and gas exploration and production.

Aramco is no longer satisfied with being the world’s largest oil exporter - it wants to be the world’s biggest integrated energy company. Its new emphasis on a suite of downstream projects is putting its hydrocarbon resources to greater use, similar to increasing productivity.

The GCC currently accounts for less than 2 percent of the $4 trillion global chemicals industry. If Aramco can tap into even just a fraction more, it could add significant wealth to its books. It has begun to do so through the PlasChem and PlusTech parks, which are expected to attract billions of dollars in private investment and create 3,500 jobs.

Aramco is spreading geographically, too, with joint ventures or wholly-owned projects in South Korea, Indonesia, the US and the Netherlands, as well as invaluable partnerships with research and development institutions both in the kingdom and abroad.

Its Detroit Research Center, for example, is working with engine designers and car manufacturers to create new fuel technology, including cleaner options. Aramco is also pivotal in Saudi Arabia’s goal to become a “solar powerhouse” and has partnered with GE to produce the kingdom’s first wind turbine.

Its creation of several relevant technology start-ups also could generate future revenues while creating greater efficiencies both in time and cost.

The spreading of its wings will build strength and resilience into Aramco’s already well formed business, as well as monetary benefits.

Chairman Khalid Al Falih said, referring to 2016: “By seeking new prospects, realising potential, and building new capacities, the company created greater value for itself, its customers and stakeholders.”

That, of course, fares well for the IPO’s prospects. But there are still plenty of unanswered questions.

Investors will, for example, demand detail and certainty on Aramco’s expected involvement in what could fairly be described as state welfare. Things such as building an anti-terrorism centre, a stadium and universities, and even working to eradicate malaria.

The annual report does not indicate Aramco’s future involvement in the kingdom’s domestic agenda, though it is assumed it will still be somewhat entangled. But next year it will need to lay out clear expectations if it wants investors to take it seriously.

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